New Zealand Rate Cuts Loom as Unemployment Signals Economic Weakness
Is New Zealand’s economic recovery stalling? Recent unemployment figures, hitting 5.2% in June – the highest level since 2020 – are sending strong signals to the Reserve Bank of New Zealand (RBNZ) and economists alike. While slightly better than anticipated, the data reveals a concerning trend: a weakening labour market and growing “excess capacity” that could pave the way for further official cash rate (OCR) cuts.
The Rising Tide of Unemployment & ‘Hoarded Labour’
Stats NZ’s latest report showed a slight uptick in unemployment, but the story isn’t simply about those numbers. A key factor is the declining labour force participation rate, now at 70.5%. This indicates that people are giving up on finding work, masking the true extent of labour market weakness. Economists at ANZ believe businesses may be holding onto staff – “hoarded labour” – anticipating a recovery that hasn’t materialized. Should that recovery falter, these jobs are at risk.
This ‘hoarding’ phenomenon is a critical nuance. It suggests the unemployment rate isn’t a fully accurate reflection of economic health. As Kiwibank chief economist Jarrod Kerr points out, the underutilisation rate (which includes both unemployment and underemployment – people working fewer hours than they’d like) is rising, indicating a broader issue than just job losses. A fall in employment points to a potential contraction in GDP, a worrying sign for an economy hoping to bounce back from recession.
Rate Cuts on the Horizon: Consensus Among Economists
The consensus is building: the RBNZ is likely to respond with further monetary easing. ANZ economists see “no roadblocks” to an OCR cut in August. ASB economists predict a 25 basis point (bp) cut next month, potentially pushing the OCR below 3% by year-end as the RBNZ accelerates efforts to revive the economy. BNZ’s Mike Jones echoes this sentiment, anticipating at least another 25bp cut this month, and likely another after that.
OCR cuts aren’t a guaranteed fix, but they represent a key tool in the RBNZ’s arsenal. The central bank is increasingly focused on factors indicating low inflationary pressure, and the current labour market data strongly supports a more accommodative monetary policy stance.
Impact on Mortgage Rates: Will Homeowners Benefit?
The question on many New Zealanders’ minds: will these OCR cuts translate into lower mortgage rates? Cotality chief property economist Kelvin Davidson suggests mortgage rates are already near their bottom, particularly for fixed-rate terms. However, others see room for further decline.
“I think they could fall a little further, as we are getting more rate cuts offshore,” says Kerr. Jones agrees, noting that the market is now pricing in further OCR downside, coupled with lower offshore rates, suggesting modest declines are still possible, particularly in shorter-term rates.
Beyond the Numbers: A Deeper Look at Labour Market Dynamics
The unemployment figures aren’t just statistics; they represent real people facing job insecurity. The fact that younger people are disproportionately leaving the workforce is particularly concerning. This suggests a long-term impact on skills development and future economic potential.
Furthermore, the decline in hours worked highlights a broader issue of economic underperformance. The economy isn’t just failing to create enough jobs; it’s also failing to provide sufficient work for those already employed.
Future Trends & Implications
Looking ahead, several key trends will shape the economic landscape. Firstly, the global economic slowdown will continue to exert downward pressure on New Zealand’s economy. Secondly, the ongoing impact of inflation, even if contained, will influence the RBNZ’s decision-making. Finally, the evolving dynamics of the labour market – including the potential for further ‘hoarded labour’ and the impact of automation – will be crucial factors to watch.
The RBNZ faces a delicate balancing act. Too aggressive a response could risk fueling inflation, while too cautious an approach could stifle economic recovery. The coming months will be critical in determining whether New Zealand can navigate these challenges and achieve sustainable economic growth.
Navigating the Economic Uncertainty
For businesses, this environment demands careful planning and risk management. Focusing on efficiency, innovation, and employee retention will be paramount. For individuals, upskilling and reskilling are essential to remain competitive in a changing job market. Understanding the broader economic context is crucial for making informed financial decisions.
Frequently Asked Questions
Q: What is the OCR and how does it affect me?
A: The Official Cash Rate (OCR) is the interest rate set by the Reserve Bank of New Zealand. It influences interest rates on mortgages, savings accounts, and other loans, impacting borrowing costs and the overall economy.
Q: What does ‘excess capacity’ mean in economic terms?
A: ‘Excess capacity’ refers to a situation where the economy has resources (like labour and capital) that are not being fully utilized. This can lead to lower inflation and potentially slower economic growth.
Q: Will lower interest rates automatically lead to lower mortgage rates?
A: Not necessarily. While OCR cuts often translate to lower mortgage rates, other factors, such as bank funding costs and competition, also play a role.
Q: What is ‘hoarded labour’?
A: ‘Hoarded labour’ refers to businesses retaining employees even when there isn’t a full workload for them, often in anticipation of a future economic recovery. This can artificially lower the unemployment rate.
What are your predictions for New Zealand’s economic outlook? Share your thoughts in the comments below!
